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“Insights and Knowledge from Warren Buffett”

Warren Buffett turned 87 years young today, and shared his best investment advice, and some insights and some quotes, including he said the 'elite' have wasted $100 billion ignoring his basic investment advice.

Warren Buffett turns 87 on Wednesday.

In honor of his birthday, Business Insider is highlighting

Buffett's best investment advice.

"Over the years, I’ve often been asked for investment advice, and in the

process of answering I’ve learned a good deal about human behavior,"

Buffett said in his 2017 annual shareholder letter.

"My regular recommendation has been a low-cost S&P 500 index fund,"

he said. "To their credit, my friends who possess only modest means

have usually followed my suggestion."

It's worth nothing that in the same letter Buffett describes Jack Bogle,

who transformed investing with the creation of the index fund, as a

"hero."

But not everyone listens to Buffett's advice. "I believe, however, that

none of the mega-rich individuals, institutions or pension funds has

followed that same advice when I’ve given it to them," he said.

He added (emphasis ours):

"Instead, these investors politely thank me for my thoughts and depart to

listen to the siren song of a high-fee manager or, in the case of many

institutions, to seek out another breed of hyper-helper called a

consultant.

"That professional, however, faces a problem. Can you imagine an

investment consultant telling clients, year after year, to keep

adding to an index fund replicating the S&P 500? That would

be career suicide. Large fees flow to these hyper-helpers,

however, if they recommend small managerial shifts every

year or so. That advice is often delivered in esoteric gibberish that

explains why fashionable investment 'styles' or current economic trends

make the shift appropriate.

"The wealthy are accustomed to feeling that it is their lot in life to get the

best food, schooling, entertainment, housing, plastic surgery, sports

ticket, you name it. Their money, they feel, should buy them

something superior compared to what the masses receive.

"In many aspects of life, indeed, wealth does command top-

grade products or services. For that reason, the financial

'elites' – wealthy individuals, pension funds, college

endowments and the like – have great trouble meekly signing

up for a financial product or service that is available as well to

people investing only a few thousand dollars. This reluctance of

the rich normally prevails even though the product at issue is — on an

expectancy basis — clearly the best choice.

My calculation, admittedly very rough, is that the search by the

elite for superior investment advice has caused it, in

aggregate, to waste more than $100 billion over the past

decade. Figure it out: Even a 1% fee on a few trillion dollars adds up. Of

course, not every investor who put money in hedge funds ten years ago

lagged S&P returns. But I believe my calculation of the aggregate

shortfall is conservative.

"Much of the financial damage befell pension funds for public

employees. Many of these funds are woefully underfunded, in part

because they have suffered a double whammy: poor investment

performance accompanied by huge fees. The resulting shortfalls in their

assets will for decades have to be made up by local taxpayers.'

"Human behavior won’t change. Wealthy individuals, pension funds,

endowments and the like will continue to feel they deserve something

'extra' in investment advice. Those advisors who cleverly play to this

expectation will get very rich. This year the magic potion may be hedge

funds, next year something else. The likely result from this parade

of promises is predicted in an adage: 'When a person with

money meets a person with experience, the one with

experience ends up with the money and the one with money

leaves with experience.'

In honor of his August 30 birthday, we decided to look back at

one of his brilliant insights.

Back in 2010, in an interview with the Financial Crisis Inquiry

Commission, Buffett answered several questions about what he thought

caused the housing and credit bubble.

The interview comes from a document dump from the National Archives,

which in 2016 released transcripts, meeting agendas, and confidentiality

agreements from the FCIC. The group was set up in the aftermath of the

crisis by Congress to look into the causes of the event.

During the interview, Buffett also gave a crystal clear explanation of how

bubbles are formed. It's a great read for anyone interested in investing

or, more broadly, human behavior.

Anyway, here's Buffett (emphasis ours):

"My former boss, Ben Graham, made an observation 50 or so years ago

to me that it really stuck in my mind and now I've seen evidence of it.

"He said; 'You can get in a whole lot more trouble in investing

with a sound premise than with a false premise.'

"If you have some premise that the moon is made of green cheese or

something, it's ridiculous on its face. If you come out with a premise that

common stocks have done better than bonds ... [that] became the

underlying bulwark for the [1929] bubble. People thought stocks were

starting to be wonderful and they forgot the limitations of the original

premise ... So after a while, the original premise, which becomes sort of

the impetus for what later turns out to be a bubble is forgotten and the

price action takes over.

"Now, we saw the same thing in housing. It's a totally sound premise that

houses will become worth more over time because the dollar becomes

worth less ...

"And since 66% or 67% of the people want to own their own home and

because you can borrow money on it and you're dreaming of buying a

home, if you really believe that houses are going to go up in

value, you buy one as soon as you can. And that's a very

sound premise. It's related, of course, though, to houses

selling at something like replacement price and not

far outstripping inflation.

"So this sound premise that it's a good idea to buy a house this year

because it's probably going to cost more next year and you're going to

want a home, and the fact that you can finance it gets distorted over time

if housing prices are going up 10 percent a year and inflation is a couple

percent a year. Soon the price action – or at some point the price

action takes over, and you want to buy three houses and five

houses and you want to buy it with nothing down and you want

to agree to payments that you can't make and all of that sort of

thing, because it doesn't make any difference: It's going to be

worth more next year.

"And lender feels the same way. It really doesn't make a difference if it's

a liar's loan or you know what I mean? ... Because even if they have to

take it over, it's going to be worth more next year. And once that gathers

momentum and it gets reinforced by price action and the original

premise is forgotten, which it was in 1929.

"The Internet was the same thing. The Internet was going to change our

lives. But it didn't mean that every company was worth $50 billion that

could dream up a prospectus.

"And the price action becomes so important to people that it

takes over the — it takes over their minds, and because housing

was the largest single asset, around $22 trillion or something like that,

not above household wealth of $50 trillion or $60 trillion or something

like that in the United States. Such a huge asset. So understandable to

the public — they might not understand stocks, they might not

understand tulip bulbs, but they understood houses and they wanted to

buy one anyway and the financing, and you could leverage up to the sky,

it created a bubble like we've never seen."

13 brilliant quotes from Warren Buffett, the greatest investor of all time

Warren Buffett is one of the most successful investors in history.

"The Oracle of Omaha" has an estimated net worth of nearly $77 billion,

making him the fourth-richest person in the world.

From drinking Coke for breakfast to carrying around an old-school flip

phone, Buffett has always done things his way.

On the occasion of his 87th birthday on August 30, we compiled a few of

his best quotes to take you inside his head.

Always know who you're dealing with.

Jason Reed/Reuters

Pick the right crowd.

Kim Kyung Hoon/Reuters

Some things take time.

David Silverman/Getty

Act with integrity.

Jason Lee/Reuters

If you want to be successful, make reading a habit.

Rick Wilking/Reuters

Bad things aren't obvious when times are good.

Ethan Miller/Reuters

Keep it simple.

Paul Morigi/Getty

Go against the crowd.

Paul Morigi/Getty

Success is not defined by a price tag or number.

Jason Miller/Getty

Be confident.

Alex Wong/Getty

Give to those less fortunate.

Rick Wilking/Reuters

Don't forget business basics.

Rusty Jarrett/Getty

You don't have to be a genius to invest well.

Pool/Getty